Why Big Banks Support Regulations Against Big Banks

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Three years ago, the government passed a bill that clamped down on the tobacco industry, putting restrictions and outright bans on everything from advertising to flavored cigarettes.

The bill had one surprising supporter: cigarette giant Altria. Altria was the only tobacco company to support the legislation, a fact it proudly states on its website.

Why would Altria support a bill designed to hurt its business? Perhaps because it already controlled 50% of the American tobacco market. By restricting advertising and growth opportunities for the entire industry, the bill made it nearly impossible for smaller rivals to gain on Altria's territory.


I thought of this story while talking with Motley Fool banking analyst John Maxfield this week. He noted that too-big-to-fail banks might counterintuitively support regulations that attempt to end "too big to fail."

Regulators really want to end "too big to fail," but no one has the backbone to break up banks that are currently too big to fail. However, regulators will very likely prevent more medium-sized banks from merging and becoming too big to fail. Just like Altria, big banks may support regulations that appear to hurt their business when they actually solidify their competitive advantage.

"If I could push a button and eliminate Dodd-Frank, would I do it? No, I would not," said Goldman Sachs CEO Lloyd Blankfein last year, referring to the financial reform bill designed to end "too big to fail."

Earlier this year, Bank of America CEO Brian Moynihan said the principles of Dodd-Frank "are all good."

We've long known that being too big to fail produces competitive advantages, Studies show that such banks have a lower cost of capital; I've shown how this advantage could explain most of JPMorgan Chase's results. And with compensation often tied to size, bank CEOs love being big.

But those benefits aren't open to any bank. The megamergers that enabled the current crop of banking giants won't be repeated anytime soon. Competition for the too-big-to-fail crowd isn't likely to grow. If you're already there, you're set. If not, too bad.

There are more than 6,000 banks in the United States. But the disparity of assets in just the top 80 is massive, with only a handful of banks being too big to fail:

Source: S&P Capital IQ. Not all names are listed to save space. 

A lot of bank investors worry about the impact new regulations and will have on big banks. Maybe they're right to worry. Or maybe what looks like the biggest threat is actually an overlooked advantage.

What do you think? 

And for a detailed report on a quality bank we like and a top pick Warren Buffett has owned for years, check out our report "The Only Big Bank Built to Last." It's free, so click here to access it now.

The article Why Big Banks Support Regulations Against Big Banks originally appeared on Fool.com.

Fool contributor Morgan Housel own shares of Altria. The Motley Fool recommends Bank of America and Goldman Sachs and owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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